Fortune Brands Home & Security, Inc. — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. The filing entity is Fortune Brands Home & Security, Inc. (the name shown in the filing). Financial figures are unaudited and in millions except per-share amounts.
Business context and results
The company sells branded cabinetry, plumbing products, doors and security products. Management cited improving U.S. home-products markets, new products and pricing as sales drivers; results also reflected 2016 plumbing acquisitions. Management cautioned that interim results may not indicate full-year performance and that operating cash flow is seasonal, typically strongest in the third and fourth quarters.
| Metric | Q2 2017 | Q2 2016 | First half 2017 | First half 2016 |
|---|---|---|---|---|
| Net sales | $1,365.4 | $1,297.8 | $2,552.2 | $2,404.3 |
| Operating income | $212.4 | $187.7 | $327.3 | $283.2 |
| Income from continuing operations | $140.3 | $125.1 | $217.7 | $186.1 |
| Net income attributable to Fortune Brands | $137.7 | $125.2 | $215.1 | $186.2 |
| Diluted EPS, continuing operations | $0.90 | $0.80 | $1.39 | $1.18 |
| Diluted EPS, total | $0.88 | $0.80 | $1.37 | $1.18 |
Financial position and cash flow
- Growth and margins: Sales increased 5.2% in Q2 and 6.2% in the first half. Operating income rose 13.2% and 15.6%, respectively. Calculated operating margins were approximately 15.6% versus 14.5% in Q2 and 12.8% versus 11.8% in the first half.
- Cash flow: First-half operating cash flow was $171.2, compared with $165.0. Capital expenditures were $59.5, versus $74.7; operating cash flow less capital expenditures was approximately $111.7, versus $90.3. Cash increased by $1.2 to $252.7.
- Liquidity and debt: At June 30, cash was $252.7 and current assets and current liabilities were $1,553.1 and $791.1. Long-term debt was $1,391.9, including $500.0 drawn on the $1.25 billion revolving facility and $891.9 carrying value of senior notes. The company reported compliance with credit-facility covenants.
- Capital returns: First-half dividends were $55.3 and share repurchases were $32.7. Approximately $490 million remained authorized for repurchases at June 30; the programs do not require the company to buy shares.
Changes versus prior year and management commentary
- First-half sales growth was broad-based: Cabinets +2.7%, Plumbing +13.4%, Doors +6.1% and Security +2.3%. Plumbing growth included acquired businesses and higher international sales, principally in China.
- Q2 Security sales declined 2.0%, reflecting timing and unfavorable foreign exchange. Plumbing sales rose 14.9%; Cabinets and Doors increased 1.3% and 4.5%.
- Management attributed higher operating income mainly to sales growth and productivity, partly offset by unfavorable mix, raw-material costs, employee costs and advertising. Q2 sales also faced approximately $8 million of unfavorable foreign exchange and lower Security sales due to timing.
- Management described the U.S. housing recovery as ongoing and identified consumer confidence, employment, home prices, mortgage rates and credit availability as relevant market factors. It provided no specific quantitative full-year earnings or revenue guidance in the supplied filing text.
Unusual items, risks and contingencies
- The April sale of Field ID resulted in a $2.4 pre-tax loss; the company also recorded $3.2 of first-quarter asset impairment charges related to the planned sale. Field ID was not presented as a discontinued operation. The $2.6 loss from discontinued operations related primarily to prior sales of the Waterloo tool-storage and Simonton window businesses.
- First-half restructuring charges were $3.1, primarily severance in Security and Plumbing, compared with $9.3 in the prior-year period. Lower restructuring costs also supported the Security segment’s operating-income comparison.
- The company cited exposure to housing and remodeling activity, economic conditions, competition, key customers and suppliers, raw-material availability and prices, foreign exchange, international operations, pension costs and regulatory compliance. It reported no material change to previously disclosed risk factors.
- Goodwill was $1,832.1 and net identifiable intangible assets were $1,093.2. Certain Cabinets and Doors tradenames had fair values less than 10% above carrying value at year-end 2016; the company said a further fair-value decline could result in future impairment. Annual impairment testing was planned for Q4 2017.
- Pending ordinary-course litigation and environmental remediation matters were disclosed. Management did not expect them to have a material adverse effect, while noting that outcomes and remediation estimates involve uncertainty. The company also said unrecognized tax benefits could decrease by $4–$6 within 12 months.
- Of cash and cash equivalents, $198.3 was held at non-U.S. subsidiaries; repatriating certain balances could create adverse tax consequences. Management expected approximately $10 of pension contributions in 2017.
Important facts for investors to verify
- How much Plumbing growth came from acquisitions versus organic sales, and whether sales and margins continue to improve across segments.
- Whether Security’s Q2 sales decline was temporary, and the continuing effects of foreign exchange, raw-material costs, pricing and product mix.
- Working-capital trends: receivables and inventories increased during the first half, contributing to cash use; assess cash generation alongside seasonal patterns.
- Debt levels, revolving-facility availability and covenant compliance, plus the potential tax cost of accessing overseas cash.
- Valuation headroom for the identified tradenames, future impairment-test results, and developments in litigation, environmental remediation and tax matters.
- Actual 2017 performance against management’s market commentary; the filing provides no specific quantitative full-year guidance.